THEORY OF PRODUCTION MARGINAL PRODUCT

The production in the short-run The production function = the relationship between the amount of input required and the amount of output that can be obtained. Total product (total physical product) = the total amount of output produced, in physical units Average product (AP) – total output divided by total units of input, means production per unit of input. Marginal product – the extra product or output added by 1 extra unit of that input while other inputs are held constant.

Relationships between total and marginal product at first MP grows, which means, TP grows faster than the amount of input, in the second phase, MP declines, but is positive – means, TP grows slowly than the amount of used input, theoretically can turn up third situation – MP is negative, which means decline in TP.

Total, Marginal and Average Product The law of diminishing returns: = the extra production obtained from increase in a variable input will eventually decline as more of the variable input is used together with the fixed inputs

Production in the long-run Equal-product curve (Isoquants) Characteristics: more distant curve from the zero corresponds to higher output, equal-product curve is downward-sloping, convex The slope: Marginal rate of technical substitution The equal-cost line (Isocost line) = all combination of labor and capital that are of equal total cost The equation: TC = wL + rK the slope of equal-cost line:

THE MINIMUM-COST INPUT CONDITION combining the equal-product and equal-cost lines, we can easily determine the optimal, or cost-minimizing, position of the firm. = the marginal product per crown received from the (last) euro of expenditure must be the same for every productive factor.

Long-run Production Function and Least Cost Condition

Returns to scale = reflects the responsiveness of total product when all the inputs are increased proportionately Three important cases should be distinguished: constant returns to scale – where a change in all inputs leads to an equally large increase in output, decreasing returns to scale – when a balanced increase of all inputs leads to a less-than-proportional increase in total output, increasing returns to scale – arises when an increase in all inputs leads to a more-than-proportional increase in the level of output.

TECHNOLOGICAL CHANGE occurs when new or improved engineering and technical knowledge allows more output to be produced from the same inputs, or when the same output can be produced with fewer inputs depict by two different ways: production function as a relationship between inputs available and output produced in economy, productions function as a combination of different kinds of outputs.

TASKS: Decide how many workers will be optimal to hire, as long as the wage rate on the perfectly competitive labor market is 210 units/per hour and unit of production is sold for 42 units, having known following dates about total product: 2. Také decision about the area of land hired. Price of 1t production is 35,- units, rent for hiring land is 1 400,- units and having known following returns from land: 3. The production of the same output is possible by means of following combination of labor and capital: 4. Which combination would choose the economist minimizing cost in case: Capital is three times more expensive than labor, Price of capital is 24 unit, price of labor is 19 unit. L 1 2 3 4 5 6 TP 11 19 24 28 30 31 ha 1 2 3 4 5 6 Total return 80 140 190 230 260 290 A B C D labor 7 10 23 40 capital 50 38 20